One of the odd things about the Apple (NASDAQ:AAPL) iPhone is how little the company has revealed about its relationship with AT&T (NYSE:T), its exclusive U.S. carrier. Bernstein Research hardware analyst Toni Sacconaghi took a look at that issue in a report today, and concluded that investors are completely missing the true value of the iPhone as a result.
As Sacconaghi notes, Apple has not disclosed the size of the payments it is receiving from AT&T. And he thinks most sell-side analysts are being too conservative in their modeling on this point. He estimates that Apple’s carrier payments will average about $350 per unit, and says they will contribute 45% of reported iPhone revenue and nearly 70% of gross profits during the September 2008 fiscal year. In fact, Sacconaghi says that the iPhone business will contribute about 75% of Apple’s earnings growth over the next four years.
Sacconaghi is looking for 6.8 million iPhones to be sold in FY ‘08, generating an estimated $1.1 billion in gross profits. That calculation spurred the analyst to boost his ‘08 EPS estimate to $5, from $4.84; the consensus, he notes, is $4.49.
Sacconaghi today lifted his price target on the stock to $175 from $135. But he also says that Apple’s current valuation is “justifiable, but not especially compelling.”
He says that buying Apple at current levels require an investor to belief the company can sell 10 million iPhones in 2008 without sacrificing the high profitability of the business,” a scenario he calls “unlikely.”
Sacconaghi adds that the strong earnings power of carrier payments could allow Apple “to pull some strategic strings” to drive up unit sales, but only at the expense of profitability. “The iPhone’s substantial revenue share potentially allows Apple to price the iPhone very aggressively - perhaps even selling the device at a loss - to stimulate sales,” he writes. “However, this comes at the expense of profitability, and unless the demand elasticity was high, our analysis indicates that it would be difficult for Apple to significantly move the needle on earnings.”
Apple today is up 32 cents at $168.23.